Fed's Fischer sees little risk of falling behind the curve

Fed watchers continued to try to infer the pace and timing of the next interest rate increases over the weekend, after the central bank's vice-President, Stanley Fischer described the decision to stay put in September as "a close call".

Nonetheless, in remarks prepared for a speech at the Group of Thirty International Banking Seminar in Washington DC, Fischer also said there was "little risk of falling behind the curve" in terms of policy tightening, echoing some of the more patient voices at the monetary authority.

"[...] the neutral nominal federal funds rate--that is, the interest rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel--is currently low by historical standards. With the federal funds rate modestly below the neutral rate, the current stance of monetary policy should be viewed as modestly accommodative, which is appropriate to foster further progress toward our objectives.

"But since monetary policy is only modestly accommodative, there appears little risk of falling behind the curve in the near future, and gradual increases in the federal funds rate will likely be sufficient to get monetary policy to a neutral stance over the next few years," Fischer said on 9 October.

In that regard, he specifically referenced the median projection submitted by Federal Reserve board members and Fed presidents on 21 September, which called for an end-2017 Fed funds rate of 1.1%, versus the current range then between 0.25% to 0.50%.

Significantly, he toed the same line as Fed chair Janet Yellen, explaining that the decision not to raise rates at their last policy meeing did not reflect a lack of confidence in the economic outlook, but rather a preference for collecting "further evidence" of continued progress towards their objectives.

Fischer also described the September jobs report, released on 7 October, as "solid", describing the recent move higher in the labour force participation rate as a "welcome development", albeit within a declining longer-run trend.

The veteran central banker referenced how the fading effect from the US dollar's appreciation since mid-2014 and a return to growth for US exports among the reasons why he expected the expansion to continue apace.

Household consumption should also continue to support growth over the back-half of 2016 and the large inventory correction which began in early 2015 had now likely run its course, he said.

Business investment was also expected to pick-up in the second half of 2016 as the drag from the oil sector diminished.

At one point in his speech, he also noted the recent stabilisation in the US oil rig count.

As regards the inflation outlook, the policymaker expected inflation to move closer to the Fed's 2.0% target as oil prices and the US dollar stabilised.

"Moreover, as economic growth has picked up and some of the earlier concerns about the global outlook have receded, the Committee judged the risks to the U.S. economic outlook to be roughly balanced."